Everything you ever wanted to know about home loans

Let’s face it, home loans are confusing. There are so many numbers, terms, clauses, and conditions that a lot of people just sign to get it over with. We’ll let you in on a secret though: once you understand a few basic things, home loans are quite simple. Here’s what you need to know:

1. Loan-to-Value (LTV) ratio

The LTV is the percentage of your property price or value (whichever is lower), that the bank can lend you. The maximum LTV that a bank can grant you is 80 per cent. For example:

Say you’re buying a resale flat at $650,000, and the property value is $630,000 (this is not unusual for resale flats, the difference is known as Cash Over Valuation, or COV).

The maximum bank loan would be 80% of $630,000, or $504,000.

Note that the bank may not always give you the full 80%; the LTV can vary based on your age, the age of the property, the number of outstanding home loans you have, and your credit score.

2. The interest rate

Most interest rates in Singapore are pegged to the Singapore Interbank Offered Rate (SIBOR), Swap Offer Rate (SOR), or are simply set by the bank (board rate). With GoBear, this is found under “rate type” on the comparison page.

SIBOR reflects the rate at which banks lend to one another. It changes dail and is regulated by the Monetary Authority of Singapore (MAS). On GoBear, this is how it often appears:

1st Year – 1.46% (SIBOR+0.65%)

This means the interest rate is the SIBOR rate (whatever it is at the time), plus a spread of 0.65%.

Note that SIBOR loans tend to follow a general pattern, with the first three years having lower rates (teaser rates), followed by a higher rate on the fourth year and thereafter.

SOR works similar to SIBOR, except the SOR rate is based on the exchange rate between the Singapore dollar and US dollar. SOR is usually used for commercial properties.

Lastly, there is the bank’s board rate. This means you leave it up to the bank to set the rate. An example of this would be the Fixed Home Rate (FHR) by DBS – the interest rate of your home loan is pegged to DBS fixed deposit rates.

3. Fixed rates

Sometimes, the interest rate will say something like:

Fixed (2 years, then SIBOR)

This would mean the interest rate is fixed (does not change) for two years, but after that it reverts to being a variable SIBOR rate (see point 2).

Note that there are no perpetual fixed rates for home loans in Singapore.

4. Interest rate period

Also under “rate type”, you will see an interest rate period. For example, “one-month SIBOR”, or “three months SIBOR”.

Now in point 2, we explained that SIBOR rates change every day. The interest rate period tells you when the bank adjusts your loan interest to match the rate. Three-month SIBOR means that the bank adjusts your interest rate every three months. One month SIBOR means the rate is adjusted every month.

5. Lock-in

If there is a lock-in clause, this refers to the number of years during which you cannot refinance a loan.

If you attempt to refinance while under a lock-in, this usually means a penalty of 1.5% of the un-disbursed loan amount; but it varies based on the policy of the bank. See the “cancellation fee” stated under the home loan.

Note that a fixed rate period is always, by default, a lock-in period. If the loan says two years fixed, those two years will also be the lock-in period.

Lock-in periods are not always bad. They can result in lower interest rates - and given that few people refinance within the first three years, short lock-ins are often irrelevant to the borrower.

6. Legal subsidy

There are fees for the legal paperwork involved in the loan. These are called conveyancing fees, and they vary with the law firm used. In general, the price ranges between $1,500 to $2,000.

Sometimes, a bank will provide a subsidy for this fee. This subsidy is quoted as a percentage of the loan amount, to a maximum number. For example, say the legal subsidy is 0.2% of the loan amount, to a maximum of $2,000.

If you are borrowing $700,000, the maximum subsidy would be $1,400.

7. Valuation fee

The bank will engage a qualified third party to perform a valuation. This is based on the size of the house, but it usually comes to around $400 or $500.

8. Late payment fee

This is a fine for missing loan repayments. It varies between banks but typically ranges between $50 and $100.

In some cases, the late payment fee can be reversed, if you pay a day or two after the due date. It’s up to the bank to be lenient, but do call them and ask.

9. Early repayment fee

This is the fee for attempting to repay your home loan early (almost always a bad idea). This fee exists because the bank needs to recoup the amount they would have made in interest repayments.

The fee is usually around 1.5% of the loan amount.

Contrary to what you may have read on personal finance websites, it is not financially prudent to rush home loan repayments.

10. Fire insurance

It’s mandatory to buy fire insurance in Singapore. Banks have their own preferred insurers, but you can use your own if you want (there’s usually a fee of $100 per year).

Note that fire insurance is not the same as home content insurance, or Mortgage Reducing Term Assurance (MRTA).

One last thing to know…

Home loans are a competitive market, and the rates for each bank can change every month. There’s never an advantage to paying more for your home loan, so always look for the lowest interest.